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Forever 21 to Acquire Retailer Gadzooks

February 18, 2005|Leslie Earnest | Times Staff Writer

Forever 21 Inc., a fast-expanding Los Angeles apparel retailer that targets teen girls and young women, is planning to buy competitor Gadzooks Inc. out of bankruptcy for about $33 million.

That would dramatically increase the size of Forever 21, a 200-store chain. Executives said Thursday that the retailer had agreed to assume the leases of at least 150 Gadzooks stores.

"We're going to run them as Gadzooks and build upon that brand and, given our fashion knowledge, evolve the brand into something that customers want," said Larry Meyer, a senior vice president at Forever 21.

Carrollton, Texas-based Gadzooks has no stores in California, but Meyer said that could change.

Analysts, meanwhile, said it might not be easy to fix what ails Gadzooks, which filed for Chapter 11 bankruptcy protection a year ago after dumping its male apparel business in 2003 to focus on teen girls and young women.

"I think it will present a whole new set of challenges for the folks at Forever 21, who do not have, to my knowledge, a lot of experience running smaller stores," said Robert Buchanan, an analyst at A.G. Edwards & Sons Inc. The typical Forever 21 shop is about three times the size of a Gadzooks store.

Forever 21 has other options, analysts say. For example, the company could decide to convert the Gadzooks locations into smaller versions of its namesake stores or use the real estate to launch a new concept. In fact, Meyer said it was Gadzooks' real estate that made it tempting.

In any case, analysts said the planned acquisition proved what they knew: Forever 21 is on a roll.

"They're just getting more aggressive," said Elizabeth Pierce, an analyst at Sanders Morris Harris. "You have to wonder: What's next?"

The retailer opened its first store -- then called Fashion 21 -- on Figueroa Street in L.A. in 1984. Recently, it has been opening about 35 stores a year. There are 69 in California.

The company is also in 27 other states and Canada. It has two stores in the United Arab Emirates and one in Singapore. In 2001, it introduced XXI Forever stores, some of which are 25,000 square feet, 10 times the size of a typical Gadzooks.

On Saturday, Forever 21 will open its first accessories store, dubbed ForLove21, at the Glendale Galleria mall.

The privately held company's sales for the fiscal year ending Feb. 28 are expected to be about $640 million, Meyer said. The company plans eventually to go public, he added. "We'll go public when the timing is right and we feel it's appropriate."

As Forever 21 expanded, it became a leader in the world of "cheap chic" fashion and posed fierce competition for two other California retailers: Wet Seal Inc. in Foothill Ranch, which has about 450 namesake stores and Arden B. stores, and San Diego-based Charlotte Russe Holding Inc., parent of the 370-store Charlotte Russe and Rampage chains.

Forever 21 is "probably the most well-trafficked purveyor of fast, inexpensive fashion," said Adrienne Tennant, an analyst at Wedbush Morgan Securities. "They know what's going to be hot, and they always seem to be on the mark with what the key trends are."

As competition intensified, some retailers took a beating, including Wet Seal and Gadzooks.

Gadzooks, which grew to about 450 stores at its peak in 2003, sold about 100 of them and then abandoned its male business to focus on females. But the transition was too tough.

"We literally gave away half our business because we were half male before that," Chief Executive Jerry Szczepanski said. "Unfortunately, it came back slower than we thought."

By last year, Gadzooks' annual sales had slipped to nearly $259 million from almost $326 million in 2003. The company has not turned a profit since 2002 and last year lost almost $62 million.

Gadzooks trades on the pink sheets. Its share price dropped to less than $1 at the end of last year and has since drifted lower. Over the last week, the highest it closed was 11 cents a share. On Thursday, it closed at a three-month low of 2 cents a share.

The $33 million that Forever 21 plans to pay for Gadzooks includes $23 million in cash, a $2.7-million note and the assumption of certain liabilities, parties associated with the deal said.

The sale is reminiscent of Wet Seal's acquisition a decade ago of women's clothing chain Contempo Casuals. Then, Wet Seal had 133 stores and Contempo Casuals had 239.

Gadzooks has a total of 242 stores, and Meyer said Forever 21 might decide to take more than 150 of them.

Wet Seal, meanwhile, is in the process of shuttering 150 stores -- and Meyer said Forever 21 might pick up some of that real estate if it suited its purposes.

Regarding Gadzooks, Meyer declined to say specifically how that chain might change or whether it might reintroduce clothes for teenage boys and young men.

"The merchandise strategy will evolve," he said. "It will start as ladies, and what it evolves into will change over time."

Although both retailers sell to trend-hungry girls and young women, Forever 21 targets a wider age group with a broader selection of merchandise, Meyer said, whereas Gadzooks is more sharply focused on shoppers between the ages of 17 and 22.

"We see that as a somewhat separate market that we can improve upon," he said.

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